1. The Medicare Maze
Yiscah Bracha
Scott Campbell

2. Medicare’s reimbursement system
has implications for…
 Medical device manufacturers
 Hospitals and physicians
 Health and welfare of the entire U.S.
population

3. Our Agenda:
 Illuminate Medicare’s reimbursement system
 Show, in theory, how reimbursement system
affects medical device industry
 Give example of a device manufacturer
attempting to use the system to earn market
share and thrive
 Identify perversities in the existing system
 Offer recommendations for change

4. Our focal point:
Type of Decision
In which part of
the maze will we Coverage Reimbursement
focus our gaze? (will CMS (How much
pay for it?) will CMS pay?)
Where “Local” FFS/MC FFS/MC
decision
is made National FFS/MC FFS/MC

5. Medicare reimbursement policy:
Concept…

6. Location of curve depends on:
 Treatment site  Condition treated
 Hospital  Back pain
 Outpatient ambulatory  Pneumonia
 Doc office  Heart attack
 Skilled nursing facility  Heart failure
 Laboratory  Cancer
 Home  … more

7. Curve location may also be set by:
 Type of treatment
(e.g. procedure used)
 Medical
 Surgical

8. Line shift depends on:
 Patient condition
 Co-morbidities
 Complications
 Outlier adjustment
 Treating facility  Prevailing wage rate
 Teaching hospital  Urban +
 Safety net (e.g. serves  Rural -
many uninsured)

9. Source of “estimated cost”
 Total costs: historical records submitted
by multiple providers
 Component costs (if used):
 Obtainaverage across providers for ratios of
components
 Use average ratios to allocate costs to
components

10. New reason to “shift the line”:
 Add-on Payment for new services and
technologies
 Introduced through ’03 Medicare Modernization Act
 Provides additional payment for new medical services
and technologies that qualify
 Intended to “fill the gap” – provide addl payment until
reimbursement rate adjusted upwards
www.cms.hhs.gov/acuteeinpatientpps/downloads/1428f_i.pdf

11. Is this a free market system?
 In competitive market systems:
 Goods/services compete on basis of price &
quality OR
 Vendors submit competitive bids to win
contracts

12. In the Medicare system…
 Vendors incur costs; ‘appropriate
payment’ means CMS reimburses on
basis of incurred cost
 CMS tries to anticipate by setting payment
rates in advance.
 “Medicare is a big, dumb price-fixer”

13. Mechanisms for issuing payment:
 Fixed prices attached to CODES.
 Coding mechanism starts with:
 Treatment site. Within site, then code for:
 Condition and/or procedure. Within that:
 Make any shifts in the line
 Result: For given site, handling a given
condition and/or procedure, adjusted as
previously shown, CMS assigns a code with
attached reimbursement rate

14. Sites that all have own codes:
 Hospital inpatient (DRG)
 Hospital outpatient (APC)
 Physician service (CPT)
 Skilled nursing facility (per diem rate
based on RUG)

15. Hospital inpatient coding system:
Distribution of Financial Risk
Source Incurred by Assumed by
Ptt condition Patient Hospital & CMS
Treatment
Physician Hospital & CMS
choice
Complications Physician &
CMS
& discharge stat hospital

16. Hospital outpatient coding system:
Distribution of Financial Risk
Source Incurred by Assumed by
Hospital, patient
Ptt condition Patient
& CMS
Treatment Hospital, patient
Physician
choice & CMS

17. Physician service coding system:
Distribution of Financial Risk
Source Incurred by Assumed by
Ptt condition Patient CMS
Type of Physician & Physician &
treatment Patient CMS
How much Physician &
CMS
treatment patient

18. Nursing home coding system:
Distribution of Financial Risk
Source Incurred by Assumed by
Ptt condition Patient CMS & SNF
Type of
Physician SNF
treatment
How much
Physician SNF
treatment

19. Perspectives:

20. Medical device industry:
 Medicare should pay for whatever we produce
and it should pay us our production costs.
 Quote from Advamed: “Next-generation technologies
are often paid at the same level as the older
technology. Breakthrough technologies must undergo
a time-consuming process in order to obtain
appropriate coding and payment.”

21. Public policy*:
 What does ‘appropriate’ mean?
 If the device produces greater benefit at same
cost, or produces same benefit at lower cost,
the device will gain market share. No need to
adjust anything.
 If the device produces greater benefit at
increased cost, we must determine whether
the addl benefit is worth the addl cost.
* The “pure” view, before political wrangling gets in the way.

22. Patients/beneficiaries:
 I want the best that’s out there, at no risk,
even if I don’t know how to judge what
“best” means.
 Somebody else should pay for it.

23. Physicians:
 I want the authority and autonomy to prescribe
or perform any procedure I think is appropriate.
 It’s unseemly for a doctor to consider money
when life is at stake.
 Because I wield the power of life and death, I
should be paid an enormous amount of money
and nobody should ever question me.
 I should not have to face any risk.

24. Hospitals:
 Sheesh. Now what?

25. How system plays in the field:

26. Medical device manufacturers
negotiate with CMS for:
 Treatment codes that place their products
in classes with more expensive
competitors
 Treatment codes that bring add-on
payments
 Codes that specifically require use of their
product (unbundles payments to
providers)

27. Mfc’s attempt to persuade CMS:
 Demonstrate that using device is more
costly than existing practice
 Once in use, monitor (high) costs of using
device to build case to CMS to recode it to
a more costly class
 Show that by using (new) device, service
will be more costly, thus justifying an add-
on payment

28. Medical device manufacturers also
negotiate with providers to:
 Use their products rather than products of
competitors
 Ways to persuade providers:
 Demonstrate that product saves them $$
 Negotiate over price

29. Perversities:
 Device manufacturers must
simultaneously persuade:
 Providersthat device saves them money
 CMS that device should be recoded to a more
expensive class because it costs so much
money to use.

30. Example: CHF Solutions, Inc.
 Manufactures a sophisticated, yet easy to
use, mechanical pump/filter system to
remove excess fluid from patients with
fluid overload
 FDA market cleared; marked for use in
inpatient hospital and out-patient clinic
 Currently marketed in US with a direct
sales force

31. Aquadex FlexFlow Console
• Simple operator interface - two user settings
• rate of withdrawal, 10 to 40ml/minute, in
5ml increments
• the desired rate of fluid removal, 10 to
500ml/hour in 10ml increments
• Treatment is tailored to the individual patient by
prescribing a specific rate of fluid removal
• Peripheral venous access and a transportable
console (with battery) allows the patient to
move about during treatment

32. Congestion and Fluid Overload:
Heart Failure
 CHF DRG most
prevalent in U.S
(1,000,000 yearly
hospitalizations)
 Re-admission rate of
21% within 30 days
(cms.gov)
 550,000 new
diagnoses each year

33. Sales force:
 Attempts to demonstrate to hospitals that
using device will save them $$ b.c
 Reimbursement rate for CHF DRG assumes
certain length of stay
 Using device may reduce:
 Length of stay
 Costly admissions
 Hospital collects same reimbursement, but
incurs fewer costs

34. Reimbursement: Add-on payment
 Attempt to demonstrate to CMS that
device should qualify for new add-on
payment because:
 Device meets ‘newness’ criterion
 Using charge data for 51 patients, device
meets the ‘high cost’ criterion
 Better for patients - Dr. testimonials, small
outcome data

35. Result of request for add-on:
 Claim denied. Reason:
 Insufficient evidence of clinical improvement

36. CHF Solutions conducts:
UNLOAD Trial
 Compares UF device to aggressive use of
diuretics in 200 patients at multiple sites
 Clinical endpoints:
 Saltand water removal in the first 48 hours
 Safety endpoints (including renal function)
 Readmissions for CHF: Frequency, absolute
number, hospitalized days
 Visits to ED and clinic

37. UNLOAD Results (1)
 At 48 hours into treatment the
ultrafiltration group demonstrated:
 38% greater weight loss over standard care
 28% greater net fluid loss over standard
care

38. UNLOAD Results (2)
 At 90 days following hospital discharge for HF
episode, compared to Standard Care, the Ultra-
Filtration group showed:
 43% reduction in re-hospitalization for heart failure
 50% reduction in total number of re-hospitalizations
 52% reduction in ED and clinic visits
 63% reduction in days re-hospitalized

39. UNLOAD Results (3)
 The benefits in weight loss and reductions
of re-hospitalizations were seen all sub-
groups analyzed

40. Effect of trial results on company’s
bid to get add-on payment:
 By the time the trial was complete, time had
expired for add-on payment eligibility
 Next step:
 Re-approach CMS to request special CPT code …
docs more likely to prescribe device if they can bill for
prescription under separate CPT
 Approach hospitals with UNLOAD results to
demonstrate cost savings

41. This example shows (1)
 Fixed payment for HF DRG encourages
hospitals to find cost-effective ways to
treat HF:
 Gives a company like CHF Solutions, Inc.
leverage with hospital buyers
 Encourages healthy competition to produce
cost-effective treatment

42. This example shows (2):
 Existence of add-on payment encourages
company like CHF Solutions to invest
resources in obtaining add-on.
 To obtain add-on, company must
demonstrate to CMS that product is:
 New
 More effective than existing practice
 More costly than existing practice

43. To qualify for add-on payment:
 Manufacturer must demonstrate all of above
within a small window of time
 Small manufacturers seldom have such
resources. Large manufacturers do, can move
new products in the pipeline to head of the line
 Both large & small manufacturers given
incentives to show how much more costly their
product is compared to standard care

44. This example shows (3):
 Physicians more likely to use product if
they can bill separately for its use
 Encourages manufacturer to invest
resources in securing unique CPT code

45. Policy conclusions (1)
 Prospective payment & bundled payment
systems push financial risk from CMS to
providers. They encourage:
 Docs & hospitals to adopt cost-effective
strategies
 Competition among device manufacturers on
basis of price AND effectiveness at level of
hospital

46. Policy conclusions (2)
 When CMS abandons PPS and unbundles
payments, it encourages:
 Docs & hospitals to lobby CMS to unbundle more
 Device manufacturers to lobby CMS for special codes
 Manufacturer’s resources diverted away from
competition on the basis of low price for
effectiveness, towards lobbying CMS for special
treatment, on the basis of high price

47. Policy recommendation (1)
 CMS: Hold fast!
 Add-on payment law an example of not
holding fast.
 Public health policy view: Repeal the law
 Manufacturers’ view: Retain the law – “It fills a
necessary gap”

48. What else does this example
show?
 Reimbursement system seems
bewildering b.c of many different codes,
inconsistency in payment structure from
one coding system to the next
 To secure competitive advantage,
manufacturers must invest resources in
learning how to navigate the coding
system

49. Policy recommendation (2)
 CMS should drastically simplify its coding
system:
 Procedure codes used only for information,
not to set payment rates
 Payment based strictly on diagnosis, adjusted
by patient condition (case-mix).
 Use same set of diagnostic codes across
delivery sites and for all practitioners (ICD-10)

50. Policy recommendation (3):
 Congress should set budget limits for
Medicare
 Absence of limits encourages social spending
in this sector, without having to consider
opportunity costs of same social resources
spent elsewhere
 Inequitable: Medical spending for the 65+
population the only such medical spending in
the U.S. NOT subjected to budget constraints

51. Recommendation 4a
- OR -
Recommendation 4b

52. Recommendation (4a):
 CMS should base all coverage decisions
on demonstrated cost-effectiveness:
 Use coverage-with-evidence-development for
ALL goods & services, not just new ones
 Withhold coverage from dominated goods &
services
 Withdraw coverage if, over time, good/service
becomes dominated by others

53. Recommendation (4b)
 CMS should set case-mix adjusted
reimbursement rates for each diagnosis code,
based on politically-determined societal
willingness-to-pay:
 Any entity with demonstrated capacity to treat
diagnosis is eligible for payment;
 Monitor & publicize patient outcomes from different
providers; encourage patients to use publicized
reports to choose providers
 Withdraw eligibility if necessary

54. Consequences to device industry:
 Device manufacturers forced to
demonstrate both cost savings AND
effectiveness.
 Difference between recommendations 4a
and 4b is the entity to whom
demonstration must be made:
 Option 4a: Demonstrate to CMS
 Option 4b: Demonstrate to docs & hospitals

55. Stakeholder analysis: